In its response filed on June 28, PSNH claims the commission report is "rife with unresolved issues ... and is marked by inaccurate or incomplete input, trivialization of certain legal considerations and inadequate analysis."

PSNH Associate General Counsel Robert Bersak pulls no punches as he challenges what he called "a number of unsupported conclusions."

In his 20-page response, Bersak writes that the PUC report glosses over 10 years of legislative mandates that resulted in PSNH retaining coal-fired plants in Bow and Newington; "trivializes" the region's overreliance on natural gas and the safety net the plants provide; and was surprisingly adversarial in tone.

He claims PSNH was shocked at the extent to which the PUC veered from the stated purpose of the investigation it opened in January, and writes, "Instead of advancing the issues toward resolution, the report has increased the level of controversy and turned a purportedly broad-based exploration of market conditions that could have led to a constructive dialogue into what will assuredly be a contentious, agenda-driven debate over the future of PSNH's generating assets."

The PUC opened the investigation in light of continued pressure on the PSNH energy supply charge, as more customers leave the regulated utility for unregulated energy service providers. That leaves a smaller customer base to absorb the costs of operating the coal-fired plants, including costly pollution control systems installed at Merrimack Station in Bow.

PSNH pays the same price as its competitors for energy on the open market, and could be charging the same lower prices, if not for the cost-recovery on the power plants and the impact of a shrinking customer base. In suggesting that both factors could be alleviated by divesting the power plants, the PUC is reflecting an opinion voiced by competitive suppliers and PSNH critics over the years.

Assumptions challenged

Bersak suggests that regulators have bought into that argument without the in-depth economic analysis that should have been conducted before reaching conclusions that reverse a decade of legislative and regulatory history.

"The report's conclusions are based on a single set of assumptions that are taken as factual outcome, ignoring myriad other plausible scenarios," he writes.

The report assumes natural gas will remain available at low cost for the foreseeable future, that customers will continue to abandon PSNH at current rates, that the fixed costs of the power plants will stay high forever, and that gas pipeline capacity into New England will be expanded by 2016. Bersak challenges each of those assumptions, dedicating significant space to an analysis of the natural gas market.

"There is no market evidence that producers are willing to foot the bill for new pipeline projects to New England," he writes, and no incentives for power plant owners to sign long-term contracts that would change that scenario.

He suggests a better approach would be to create a more level playing field between the regulated utility and its competitors by allowing PSNH to charge competitors market rates, not cost-only, for billing and administrative services; or by requiring competitive suppliers to pay their share of PUC operating expenses.

As regards to the report's proposals for divestiture of the power plants, Bersak rejects two of them out of hand — retirement and transfer to a newly created unregulated affiliate.

"Merely shuttering the plants will not eliminate the on-going costs, such as taxes, security, insurance, etc., and the remaining book value of the plants would have to be recovered from customers," he writes. "Instead of mitigating costs, retirement would merely exacerbate costs and is not worthy of further consideration."

The PSNH parent company, Northeast Utilities, is not interested in re-entering the unregulated market, according to Bersak. Northeast Utilities made the decision to exit the competitive energy business in early 2005 and "has no interest in re-entering that market at this time," he wrote.

That basically leaves selling the plants or keeping them under PSNH ownership as the only outcomes not likely to face a court challenge.

A process proposed

The New England Power Generators Association, a trade association representing competitive electric generating companies in New England, issued its own comments on the PUC report on July 1, suggesting a process that would lead to divestiture by December 2014.

"Allowing for PSNH to continue to receive guaranteed profits and cost recovery while consumers bear increased costs is a fundamentally flawed business model," said NEPGA President Dan Dolan. "The status quo simply perpetuates an unstable and unsustainable situation. We call on policymakers to immediately begin the process to transition to the competitive model every consumer in New Hampshire deserves."

Mike Skelton, a PSNH spokesman, said such a process is unnecessary, since the state Legislature just passed a bill, SB 191, to create a statewide energy strategy.

"We believe this is a much needed and thoughtful approach, and one that we look forward to participating in. With this energy strategy under development, it does not make sense to initiate a separate approach regarding PSNH's generation assets," he said. "These issues are intertwined and should be considered as part of an overall strategy on how best to provide customer's with reliable energy options and protect them from volatility with a safety net that is backed by PSNH's regulated generation."

President Obama's recently announced plan to seek tough limits on carbon emissions from power plants also plays into the picture.

"We'll have to wait and see how the new carbon emission plan takes shape to fully understand how it will impact PSNH's coal-fired generation," Skelton said. "The plants meet all current rules and standards, and they'll have to meet any tighter emissions standards in the future."